The Fed's Inflation Gauge Is Running 0.88 Points Above Consumer Prices

The Fed's Inflation Gauge Is Running 0.88 Points Above Consumer Prices

The Federal Reserve's preferred inflation measure is now running above the consumer price index most people know, and the gap is the widest in 40 years.

Over the past four decades, core PCE inflation has averaged 0.43 percentage points below core CPI. In July it was 0.88 points above it, the largest positive gap since the data begin in 1986.

The two usually differ because they cover different things and weight them differently. CPI counts only what households pay for out of pocket, and rent carries a heavy weight. PCE also includes medical costs paid on households' behalf by employers and the government, along with some services households do not pay for directly.

What pushed PCE up this time is an item few people watch: portfolio management fees. Statisticians do not survey what people actually pay in fees. They estimate the item partly from stock market values, so when stocks rally, this category rises with them. Research group Employ America found that July's core PCE increase came mainly from this item, and PIMCO has also said AI-linked categories like this are distorting PCE readings.

So part of today's high PCE reading is a reflection of the stock market, not broadening price pressure. David Kelly, chief global strategist at J.P. Morgan Asset Management, has warned that focusing too much on PCE right now could be a mistake. But as long as the Fed targets PCE, this paper inflation will still shape its rate decisions.

Source: J.P. Morgan Asset Management, Employ America, PIMCO (Image: @MikeZaccardi)